Future restrictions for FCA Firms: Clearly the ESMA leverage rules are firmly in place now and we do not see many changes in the near term to the levels implemented. Indeed, we would argue that as the UK feels its way into a post Brexit world it may take the chance to differentiate itself on the global stage and raise these limits a tad from the levels we see now. We do not think they will go back to the previous ‘as you like’ environment but for given client types some more leverage maybe allowed at some point. The number of Clients that are moving to offshore and poorly regulated locations is a bad side effect of placing such harsh limits on all Retail Clients here, exporting the problem is not solving it.
Probably the most intriguing area for future regulation will be Crypto. Early steps from the FCA have seen them ban the most easily accessible (and sellable) product - CFD’s. We are sure the argument will go on for a long while yet but at some point, the global regulators are going to have to take a more joined up view.
If you are a believer or not as an asset class Crypto has some very appealing attributes for all parts of the industry, Brokers filling a demand from Retail Clients is just a part of it. Recent moves are attributed to institutional participation and this could be the best hope believers have of the regulator being forced to work out a more joined-up approach. The institutional interest comes for two main reasons – the higher the price goes (and the less corelation it has to other assets) the more managers want to put it into the portfolio mix. BAFIN recently approved an ETF that is cleared via Xetra in Germany and the CFTC has been allowing Crypto derivatives for about 3 years in the US so a leading regulator like the FCA will find it hard to ignore the appeals for participation for ever we feel. If this becomes another case of regulation that drives Retail Clients offshore, then the argument about the effective protection given to them will continue.
The other sector is risk taking by the institutions. Most of them care less about the underlying asset and more about the volatility, correlations, and pricing opportunities that a fast-moving price brings. Goldman recently announce a second move into trading and structuring in Crypto products and where they go others will follow – all looking for regulatory advice along the way。
As an industry the continuing undertone of bad actors, money laundering and illicit financing using Crypto needs to be addressed. Regulators all over the world have used these problems as an effective stick to stop the market maturing in a way some users would like.
In the end, agree or not the belief in the product is real and growing, for now. A price drop, like the previous ones seen, would certainly do much damage to Crypto as an asset class as we have seen before but now, we have institutional recognition of its potential regulators will, we feel, be forced to act.
Lastly some brief comments on Firm ownership: The majority of the global growth in brokerage business in the last decade has been driven by Asia. The US market is exceedingly difficult to break into due to large balance sheet requirements and regulatory oversight. Europe is a very mature market now and finding new clients is proving difficult in a very saturated environment. Asia has proved to be fertile ground for many but clearly has its own, local regulatory issues.
In the past Asia had been plagued by trading and investment scams, as the end Clients become more educated, they are looking for more legitimate Firms to deal with and many local operators have looked to set up FCA regulated firms to add credibility to their offering. The FCA took a while to get a grip of this but is now very much on the front foot when looking at new owners, products, and the client base mix of Firms that it regulates.
Anyone looking to open a company that will need to be regulated in the UK will face an extremely strict process. The Ultimate Beneficial Owner (UBO) will need to have a solid background in the industry, a robust business plan and clear reasons for wanting to open a UK based Firm. The source of wealth is a major concern to the FCA as well, previous applicants that have been a cover for illegitimate funding are excluded early in the process, the FCA now use local contacts and intelligence to investigate information given in applications.
They will not allow firms to open to simply provide a platform for Asian clients. As discussed above capital requirements and financial robustness of the Firm have risen (and will continue to do so) and they will insist on local officers to have total day to day control of the Firms activities. Previous applicants have used good local candidates for the applications and upon registration removed and replaced them with less qualified officers – the FCA will revoke registration now if they see this.
The point to take away from this is that a Firm, regulated by the FCA now, has no choice but to have an owner and officers of the highest standard, it must have the financial resources needed to operate a Firm correctly and it will receive a huge amount of regular scrutiny from the FCA to make sure it continues to comply with the rules. Being regulated in the UK is not an easy thing to attain, not an easy thing to keep and not an easy thing abuse.